You are provided the following information:
Debt $ 90000
Equity $ 90000
The shares trade at $ 10; the growth rate is 10%. Dividends last year were $ 1.00. The firm has a 40% tax rate.
$ 100 face value, 30 year, 8% coupon bonds trade at par.
1. What is the weighted average cost of capital (WACC) ?
2. What is the WACC if the CFO decides on changing the capital structure to 60% debt and 40% equity?
3. What happens to WACC if the capital structure changes to Debt 40% and 60% equity?
4. What can you say about WACC?